EU carbon market changes aim to buffer price spikes

European Union ambassadors have agreed to changes in the Emissions Trading System (ETS) that would stop the cancellation of excess CO2 allowances held in the Market Stability Reserve (MSR). Instead of being permanently removed, these surplus permits will be retained to serve as a supply buffer to protect against sharp carbon price spikes.

The decision follows pressure from member states, including Poland and Italy, to mitigate energy costs amid volatile fuel prices. Under current rules, allowances exceeding 400 million permits in the MSR are cancelled. The new agreement allows these permits to remain available, providing a mechanism to release allowances into the market if prices rise rapidly.

However, a think tank has warned that the proposed overhaul could lead to an unprecedented glut of allowances. The group cautioned that a surplus equivalent to more than five years of emissions could accumulate by 2040, potentially causing a collapse in carbon prices and undermining the bloc’s climate objectives.